Blockchains As A Foundation For A New Social Order

by Kyle Samani

Cryptographically bound peer-to-peer networks (henceforth called “crypto” for short) are going to be one of the defining technologies of our lifetimes. They enable fundamentally new forms of social organization.

These are bold claims. Once you “get” crypto, you’ll understand how crypto enables a new kind of social structure. I’ve tried to – and failed – to explain this concept to many people. Understanding the deepest and most profound implications of crypto can be difficult as crypto challenges many basic tenets of modern social structures and capitalism.

Background

Many of the best businesses in the world claim to be peer-to-peer (P2P) networks. These networks connect supply and demand in ways that was never possible before.

Obvious examples include eBay, Uber, AirBnB, the New York Stock Exchange, and Facebook. But there many others: Apple connects developers to consumers, Amazon connects merchants with consumers, Google connects website owners to searchers, insurance companies and banks connect their customers through pooled capital.

Networks that connect latent supply and demand are the foundation of the economy. These networks have created tens of trillions of dollars of economic value. These networks grow to be very large because of network effects. Once a network achieves critical mass, it becomes nearly unstoppable.

But there’s a problem.

These networks aren’t really peer-to-peer, even though they claim to be. Rather, they are mediated by network operators, who levy a tax on network participants. Some of this tax is absolutely necessary. Someone has to pay for eBay’s servers, for AirBnb’s insurance offerings, for Amazon’s customer support, etc.

But one part of the tax isn’t necessary: profits (queue Uber jokes).

In time, all network operators become rent seekers. Most are from day one.

When crypto libertarians talk about “trustless” commerce, they’re talking about cutting out the middlemen and rent seekers: the network operators. They’re talking about connecting network participants to one another – both businesses and consumers – without middlemen extracting rents.

This can be hard to imagine. Without a network operator, whose going to build the app? Who’s going to run the servers? How are consumers going to connect together? Who defines the rules of the transaction? How do you ensure equitable payment? Who manages refunds, reviews, and customer service?

Let’s walk through four increasingly abstract examples to illustrate this.

Decentralized Cloud

A significant majority of the world’s computing resources (compute, storage, bandwidth) are unutilized at a given point in time. Consumer and business hard drives lay mostly empty, and CPUs hum along at 3% utilization. Despite this, Amazon, Google, Microsoft, IBM, etc. continue to build new data centers. This is bonkers.

Filecoin, STORJ, Sia, Swam, and SAFE are protocols that allow anyone to securely store files on other people’s hard drives. File owners can always retrieve files, and the people storing the files have no idea what they’re storing. At a high level, this is accomplished this in a remarkably simple way: using standard file encryption, Shamir sharding, and distributed hash tables for content-based addressing.

Each protocol creates a market in which people with unused storage space and bandwidth can compete to store other people’s files and generate income. Because these protocols leverage people’s excess storage capacity that would otherwise sit unutilized and generate $0 revenue, these protocols will offer storage that’s much less expensive than that offered by large data centers who buy storage with the intent to rent it out. I won’t dive into things like enterprise-grade support in this post, but it’s worth noting that these protocols are designed to allow organizations to compete on value-added layers such as support.

Each of these protocols is truly peer-to-peer. You store your content on other people’s hard drives. You don’t have to care about who stores them. No one stands between you and your files. There is no middle man, no rent-seeker. You store your files on the network and you pay the network.

Golem and Elastic do basically the same thing but for compute rather than storage.

For decentralized storage and compute, the mega opportunity is not “decentralized Dropbox.” Most people are on the free tier of Dropbox! The real opportunity for these protocols is in powering Internet applications. In time, most (maybe all?) apps – to do lists, note taking apps, chat apps, finance apps, etc. – won’t have to run in a private data center; rather, apps will run on the global mesh network of everyone’s computers.

Decentralized Prediction Markets

Augur is a decentralized prediction market. What does that mean? Let’s contrast it with a famous centralized prediction market: Las Vegas sports betting.

Vegas casinos take about 10% of total bet volume as a fee, called the take rate. They justify this fee by saying it’s necessary to arbitrate the outcome. You’re paying the casino 10% for three things: 1) to act as an escrow, 2) report who won the game, 3) and to distribute proceeds to the winner. This should not cost 10%. This is insanity.

The problem with a decentralized prediction market is that if no one is in a room somewhere flipping a switch to say who won the game, how do you resolve the bet? You can’t just leave it up to a vote of market participants. If the odds on a bet are 9:1 and the 1 ends up winning, you don’t want the 9s to just outvote the 1s.

What Vegas does for 10%, the Augur protocol will do for about 1%. Network participants in the Augur network, $REP holders, will be paid by the network to truthfully report event outcomes.

How?

The Augur network runs on smart contracts. In simple terms, smart contracts act as trustless escrow services that are bound by code (no human intervention) and release money based on some predetermined criteria. You will not stake bets in the Augur network using Augur’s native’s REP token. Rather, you’ll stake bets in other cryptocurrencies such as Bitcoin and Ether. Services such as Oraclize will automatically relay the outcome of the basketball game from nba.com to the Augur smart contract. With the score of the game, the smart contract will resolve the bet and distribute the funds to the winner.

If anyone who was on the losing side of the bet believes that nba.com was incorrect (e.g. it was hacked) or that Oraclize manipulated the data, they can challenge the outcome by staking more money. At this point, the Augur smart contract asks REP holders to vote on the outcome of the basketball game. If REP holders vote in a way that overrules the challenger, the challenger loses the bond she put up to initiate the challenge. Additionally, REP holders who vote “incorrectly” – defined as those who vote against the majority of REP holders – also lose some REP. Thus, bet-losers are only incentivized to challenge the outcome reported by Oraclize if they believe a majority of REP holders will report a different outcome than that reported by Oraclize. The same is true of REP holders: they’re incentivized to vote in a way they believe all other REP holders will vote.

This system works because REP holders are independent of market participants and because REP holders are global and pseudo-anonymous, making large-scale collusion nearly impossible. Bet-losers and REP holders cannot easily identify and try to coerce REP holders to collude to report a false event outcome. Even if REP holders did collude and intentionally misreported an event outcome, people would lose faith in the Augur network and the value of REP tokens would plummet, harming the colluders.

All of this logic is handled by the Augur protocol, which lives on the Ethereum blockchain. No one in the world, including governments, can remove this smart contract or change the rules of the protocol. The protocol is like chemistry. You can’t break the laws of chemistry.

Augur is a true P2P prediction market. Anyone can partake in any prediction market – politics, sports, asset prices, hurricane severity, economic forecasting, anything. No one can prevent you from participating in any market, and no one can manipulate the outcome. Liquidity pools are global, there’s no counterparty risk, and the fees are dramatically lower than centralized alternatives.

Every company that’s regulated for compliance (financial services, pharma, food safety, oil and gas, supply chains, etc.) has to keep records. Occasionally, auditors ask these companies for their records. When this happens, the company has to find the relevant records, turn them over to the auditor, and prove to the best of their ability that they haven’t modified the records since they were generated (this is how Bernie Madeoff ran a Ponzi scheme for 20+ years; he modified records after the fact).

Factom has designed a blockchain that allows companies to commit hashed records to a public blockchain. You can’t see the contents of the document by reading the blockchain. The public can only see a cryptographic hash– a fingerprint of the record – on the blockchain.

When committing records to the Factom blockchain, companies will still store their private documents on services like Box, Google Drive, or any of the decentralized storage protocols listed above. When auditors ask for documents, companies will turn documents over in the same way they always have. Auditors will then use software to compare each document against its cryptographic hash on the Factom blockchain. If they match, auditors will instantly know, with 100% certainty, whether the company has retroactively modified any document.

As companies adopt Factom, the world will become a much more honest place. Pharmaceutical companies won’t be able to hide evidence of poor clinical trial results, the title-insurance business will collapse, supply chains will become transparent, and much more. By decentralizing record keeping, the truth will flourish.

“I think the fact that within the Bitcoin universe an algorithm replaces the functions of [the government] … is actually pretty cool. I am a big fan of Bitcoin.”

– Al Gore, former Vice President of the United States.

Decentralized money is the holy grail of P2P networks. It’s money that’s free from government control: no inflation, no capital controls, no bank account freezes, no undisclosed fees, no multi-day clearing times. Your money. Purely your money. No one can tell you what you can do with it.

If you live in a country with a stable government, this may not seem like a big deal. What’s wrong with the USD? What’s wrong with Visa/Mastercard?

But if you live in one of these countries, you might have a different perspective.

The countries in green have inflation between 10-20%. The countries in blue are >20%. These countries combined represent 780M people – more than 10% of the global population – and $2.1 trillion of GDP.

If inflation is 20% and you have $10,000, then after one year it’s as if you have $8,000. After two years, it’s as if you have $6,400. Inflation is awful. It destroys value. It prevents people from thinking long term.

That is the promise of Bitcoin. Bitcoin operates independently of governments. It is a true peer-to-peer money system, controlled by the people, for the people. In crypto, no politician can devalue your money.

Challenging Capitalism

It’s not intuitive to think that centralization is a problem that permeates so many disparate facets of the modern world. Most people don’t think that modern Internet infrastructure is woefully inefficient and unnecessarily expensive. Or that prediction markets are materially worse as a result of centralization. Or that modern record keeping practices create opportunities for fraud and deceit. Or that centralized governments destroy the value of money.

But as a result of the entirely natural evolution of capitalism over the last few hundred years, middleman have come to wield enormous power. Middlemen levy taxes on most economic transactions. We as a society have become so used to this that we’re generally blind to it. Debates about tax reform are incredibly myopic relative to the global scope of network operators levying taxes on network participants.

Cryptographically bound networks will become more profound that anyone recognizes today. Consider the number and types of rent seekers. They’re everywhere:

Governments

Insurance companies

Banks

Social networks

Internet service providers

Marketplace operators

Exchange operators

Casinos

Crypto is going to change money not only by challenging monetary policy of governments, but also by challenging the structure of society as we know it. Every industry listed above, and many others, will be radically transformed by cutting out middlemen and connecting individuals and businesses to one another via crypto. Not all corporations will transform into blissful P2P crypto cooperatives. Earth will not become some hippie utopia in which all rules and money are governed by cryptographically bound protocols.

In Sapiens, Yuval Hurari argues that the defining characteristic of homosapiens vs all other species on Earth is homosapien’s ability to tell and believe in abstract and shared stories. He calls these shared stories “fictions” to make the point clear. All of the foundations of modern society are shared fictions: money, law, religion, and corporations, to name a few.

People are bound by chemistry and physics. Corporations are not. They are purely abstract, and exist only within the confines of laws, which are themselves fictions. Green pieces of paper connote value only because the federal government tells us that green pieces of paper connote value.

Corporations have produced nearly all of the incremental value for society in the last few hundred years. These corporations – these shared fictions – were absolutely necessary for the development of modern society. The Walmart corporation has created tremendous value for society by creating a shared fiction called Walmart that coordinates the actions of 1,000,000 employees who would be otherwise autonomous and independent. Each of these people understands their role within the broader Walmart fiction from the front-door greeter to the CEO.

We finally have a way to coordinate large numbers of disparate parties trustlessly across the globe in real time through the use of economic incentives. This can be done without a shared fiction. This is possible for the first time because of crypto.

Cryptographically bound P2P networks provide a new mechanism for social organization. These networks are bound purely by protocols, which are themselves bound by math. Network participants can engage in protocol governance, as defined by the protocol. Through these protocols, billions of people will transact with one another for the first time in human history, they’ll do so without believing in any shared fiction other than the shared fiction of money itself.

Everything that can be decentralized, will be decentralized. – Johnston’s Law.